Liberalization, Privatization & Globalization | Chapter Notes for Humanities - Humanities/Arts PDF Download

Introduction

During the 1980s, India experienced a gradual decline in its economy, which culminated in a Balance of Payment (BOP) crisis in 1990. This was brought about by rising fiscal deficits and overvaluation, compounded by the Gulf War, which led to a sharp increase in oil prices and a decline in remittances from Indian workers abroad. The political instability at the time, with three different Prime Ministers within a year and a half, further exacerbated the situation. In response, India sought emergency lending from the IMF and the World Bank, which came with certain conditions that required the implementation of structural reforms to revive the economy. Dr. Manmohan Singh, who was the finance minister at the time, along with Prime Minister P.V. Narasimha Rao, introduced an industry policy that removed restrictions that were hindering the growth of industries. These structural changes, along with other stabilization measures, were part of the New Economic Policy and included Liberalization, Privatization, and Globalization (LPG).

What is liberalization

Liberalization is a process of eliminating limitations or regulations, typically within an economic framework. Following India's independence, the government adopted a protectionist approach and closed the economy to international competition, as the nascent industries were not robust enough to withstand the competition from multinational companies. The introduction of liberalization signaled the end of this era. In a phased manner, India reduced restrictions on the economy and opened its doors to the world, enabling foreign investors and the private sector to invest in domestic companies. This resulted in a free market system with minimal government interference.

Objectives of liberalization

• The opening of economic borders was aimed at evaluating the competitiveness of domestic businesses.
• The objective was to address the trade imbalance caused by the higher imports compared to exports in the BOP.
• The move was also intended to unleash the economic potential of the country by involving the private sector in economic activities.
• The decision to permit multinational companies to establish their operations in India was aimed at accelerating the country's economic growth.

Privatisation

Privatization refers to the practice of transferring ownership, management, and control of government-owned companies to private entities. This process is also known as disinvestment since it involves selling shares of a company, which is the opposite of investing. The transfer of ownership and management of public sector companies to private entities can be achieved through either an outright sale or disinvestment.

Objectives of privatization

• The main objective of privatization was to decrease government control over various industries.
• Disinvestment was used as a means to generate funds for the government by selling off shares in public sector undertakings (PSUs).
• The aim of privatization was also to reduce the burden on the government by transferring the management and ownership of certain industries to private entities.

Globalisation

Globalization involves the integration of a nation's economy with the global economy, aiming to create a world without borders that facilitates the seamless flow of goods, services, and people across nations. This has been made possible by leveraging advanced technologies that enable people to connect from any corner of the world. Globalization is the final phase achieved through the implementation of liberalization and privatization, and it involves opening boundaries for multinational companies to establish manufacturing and retail operations within the country. It also enables domestic companies to expand and achieve international levels of business. The primary focus is on foreign trade and investment.

Policy Strategies Promoting Globalisation of the Indian Economy

• Increase in equity limit of foreign investment
• Partial convertibility
• Long term trade policy
• Reduction in tariffs
• Withdrawal of quantitative restriction

World Trade Organisation (WTO)

• The World Trade Organization (WTO) was established in 1995 to succeed the General Agreement on Trade and Tariff (GATT), which was founded in 1948. GATT aimed to administer all multinational trade agreements by providing equal opportunities to all countries in the international market for trading purposes. However, GATT faced certain issues, which led to the establishment of WTO.
• WTO's main objective was to establish a rule-based trading regime, where nations cannot impose arbitrary restrictions on trade. It aimed to expand production and trade to ensure optimum utilization of world resources. The WTO agreements cover trade in goods and services, facilitating international trade through the removal of both tariff and non-tariff barriers, and providing better market access to all countries.
• As an important member of WTO, India has been at the forefront of framing rules and regulations and safeguarding the interests of developing countries. India has fulfilled its commitments towards the liberalization of trade in WTO by removing quantitative restrictions on imports and reducing tariff rates.

Functions of WTO

• Its role is to facilitate the implementation, administration, and operation of multilateral trade agreements' objectives.
• The WTO is responsible for administering the "trade review mechanism."
• The "Understanding Rules and Procedures Governing the Settlement of Disputes" is administered by the WTO.
• The WTO serves as a watchdog of international trade, examining the trade regimes of individual members.
• Disputes that cannot be resolved through bilateral talks are referred to the WTO dispute settlement "court."
• The WTO acts as a management consultant for world trade, with its economists closely monitoring global economic activities and providing studies on the key issues of the day.

Economic Crisis of 1991 and Indian Economy Reforms

• The crisis in India during the 1980s was attributed to the inefficient management of the Indian economy.
• The government's revenue was insufficient to cover its increasing expenses, leading it to rely on borrowing to meet its financial obligations, which resulted in a debt trap.
• A deficit occurs when the government's expenditures exceed its revenue.

Causes of Economic Crisis

Different causes of economic crisis are given as under

• Additional revenue was not generated despite the government's continued spending on development programmes.
• The government could not generate enough funds through internal sources such as taxation. Since sectors like social welfare and defense do not yield immediate returns, it was necessary to utilize the remaining revenue effectively, which the government failed to do.
• The income from public sector enterprises was insufficient to cover the increasing expenses.
• The foreign exchange borrowed from other countries and international financial institutions was used to meet consumption needs and repay other loans.
• No measures were taken to reduce the increased spending, and insufficient attention was given to boosting exports to cover the growing expenses.

Economic Reforms Under Liberalisation

Now, let's talk about the various areas where reforms were introduced under liberalization.

Industrial Sector Reforms

The following steps were taken to deregulate the industrial sector
(i) Abolition of Industrial Licensing Government abolished the licensing requirement of all industries, except for the five industries, which are

• Liquor
• Cigarettes
• Defence equipment
• Industrial explosives
• Dangerous chemicals, chugs and pharmaceuticals.

(ii) Contraction of Public Sector: The number of industries reserved for the public sector was reduced from 17 to 8.. Presendy, only three industries are ’ reserved for public sector. They are

• Railways
• Atomic energy
• Defence

(iii) De-reservation of Production Areas

• The production areas which were earlier reserved for SSI were de-reserved.

(iv) Expansion of Production Capacity

• The producer’s were allowed to expand their production capacity according to market demand. The need for licensing was abolished.

(v) Freedom to Import Capital Goods

• The business and production units were given freedom to import capital goods to upgrade their technology.

Financial Sector Reforms

The financial sector comprises financial institutions, such as commercial banks, investment banks, stock exchange operations, and the foreign exchange market.

The following reforms were initiated in this sector

• The Statutory Liquidity Ratio (SLR) was reduced from 38.5% to 25%, while the Cash Reserve Ratio (CRR) was reduced from 15% to 4.1%.
• The opening of the banking sector to the private sector resulted in an increase in competition, leading to expanded services for consumers.
• The role of the RBI changed from that of a 'regulator' to a 'facilitator.'
• With the exception of savings accounts, banks were given the authority to decide their own interest rates due to the de-regulation of interest rates.

Tax Reforms/Fiscal Reforms

Tax reforms encompass changes in the government's taxation and public expenditure policies, collectively referred to as fiscal policy. Prior to 1991, tax rates in the country were prohibitively high, leading to widespread tax evasion. The fiscal reforms streamlined the tax structure and lowered tax rates, resulting in reduced tax evasion and increased government revenue.

Foreign Exchange Reforms/External Sector Reforms

External sector reforms pertain to foreign exchange and foreign trade, and the sector underwent several reforms, including the following:
(i) Devaluation of the Rupee refers to a decrease in its value in relation to a foreign currency. In 1991, the rupee was devalued to promote exports and discourage imports.
(ii) Other Measures

• Import quotas were abolished.
• Policy of import licensing was almost scrapped.
• Import duty was reduced.
• Export duty was completely withdrawn.

Economic Growth During Reforms

The Gross Domestic Product (GDP) is the measure used to assess an economy's growth. Between 1980-91 and 2007-2012, there was an increase in GDP growth from 5.6% to 8.2%.
Main highlights of economic growth during reforms are given below

• The agricultural sector experienced a decline in growth during the reform period, while the industrial sector fluctuated and the service sector demonstrated an increase in growth. This suggests that the service sector is the main driver of growth.
• The economy's opening up has resulted in a rapid surge in foreign direct investment and foreign exchange reserves.
• Foreign investment, encompassing both Foreign-Direct Investment (FDI) and Foreign Institutional Investment (FII), has risen from approximately US$100 million in 1990-91 to US$400 billion in 2010-11.
• The foreign exchange reserves have increased from around US$6 billion in 1990-91 to US$300 billion in 2011-12. As of 2011, India holds the seventh-largest foreign exchange reserves in the world.
• In the reform period, India has established itself as a successful exporter of auto parts, engineering goods, IT software, and textiles. Additionally, there has been effective management of rising prices.

Failures of Economic Reforms

I- Neglect of Agriculture

The decline in agricultural growth has led to rural distress, which has escalated to a crisis in some parts of the country. Despite economic reforms, the agricultural sector has not been able to reap its benefits because of this underlying issue.

• During the reform period, there has been a decrease in public investment in the agriculture sector, particularly in infrastructure such as irrigation, power, roads, market linkages, and research and extension. Additionally, the removal of fertilizer subsidies has resulted in increased production costs, severely impacting small and marginal farmers.
• Policy changes, such as the reduction in import duties on agricultural products, the removal of minimum support prices, and the lifting of quantitative restrictions, have heightened the threat of international competition for Indian farmers.
• An export-oriented approach to agriculture has caused a shift away from producing food grains for the domestic market and towards cash crops for export.

II- Uneven Growth in Industrial Sector

The industrial sector experienced inconsistent growth during this period, primarily due to a decline in demand for industrial products caused by several factors.

• The demand for domestic industrial goods has declined due to the availability of cheaper imports.
• Globalisation has facilitated the free movement of goods and services from foreign countries, adversely affecting local industries and employment opportunities in developing nations.
• The inadequate investment in infrastructure, such as power supply, has contributed to this issue.
• Despite being a developing country, India still faces limited access to developed country markets due to high non-tariff barriers.